 (mx) ifx expo.jpeg "LATAM MX iFX EXPO")
By: Christian Alberto Borjón Valencia
In 2024, the Mexican peso faces a challenging scenario due to various factors that may influence its course. After appreciating more than 12.80% in 2023 and closing below 17.00 pesos per dollar, political events of utmost importance on both sides of the Rio Grande may generate volatility and uncertainty in USD/MXN.
This year there are elections in Mexico and the United States, a fact that has not happened since 2012, when Enrique Peña Nieto won the Presidency of Mexico and Barack Obama secured a second term in the White House.
In Mexico, a historic scenario is presented: the possibility that, for the first time in history, a woman will be the head of the executive branch. Leading the polls is Claudia Sheinbaum, the candidate of the Sigamos haciendo historia coalition, followed by Xóchitl Gálvez, candidate of the Fuerza y Corazón por México coalition. In a distant third place is the candidate of the Movimiento Ciudadano, Jorge Álvarez Máynez.
In election years, the Mexican peso tends to depreciate regardless of which party wins the election. The main cause is linked to political instability, due to the election results and the reaction(s) of the losing political parties.
In 2006 – in the election of Felipe Calderón during the first half of the year – the Mexican peso depreciated -6.58%, closing the year with a loss of -1.58%. In the election of Enrique Peña Nieto, in 2012, it appreciated 3.34% in the first six months, ending the year at 12.85, down from 13.93% at the end of 2011, with an appreciation of 7.77%. And finally, in 2018 – in the election of Andrés López Obrador – it appreciated 1.80%, closing virtually unchanged at 19.6504.
On the other side of the border, the president of the United States -Joe Biden, the Democratic candidate- and Donald Trump, on the part of the Republicans, are shaping up for a second confrontation.
During the 2016 election, when Donald Trump defeated Hillary Clinton, the U.S. dollar appreciated 20.45% against the Mexican peso, which plummeted due to the political risks posed by the election of President Trump. During his campaign, Trump focused his attacks on Mexico and the construction of a border wall. However, in the last election in 2020, the Mexican peso depreciated moderately by 5.22%, in the face of Joe Biden's victory over Donald Trump.
What are the risks in this scenario?
The fact that there is no counterweight in Mexico, given the scenario that the presidency and the majority of Congress are concentrated in a single political party, further weakens the institutional framework in the country. The involvement of the executive branch in the election can generate a climate of political instability and uncertainty, which can also create volatility in the USD/MXN.
In the United States, Donald Trump's anti-Mexico rhetoric may increase as the November election approaches. However, it is not a fact that takes the markets by surprise, given the precedent of his presidency from 2016 to 2020, where the free trade agreement between Mexico, the United States and Canada, known as the USMCA, was signed.
Monetary policy
Despite these factors, the main trigger for the positive behavior of the USD/MXN exchange rate is the monetary policy established by the Bank of Mexico – better known as Banxico. Faced with the scenario of a post-Covid-19 pandemic economic recovery, the central institute took forecasts of a possible uptick in inflation and began increases in the reference rate.
Banxico began its tightening monetary policy cycle before the U.S. Federal Reserve and raised rates aggressively. As a result, the interest rate differential between the two countries increased to 6%, favoring the attraction of capital to Mexico. This implied a greater supply of dollars, so the Mexican peso appreciated.
As a result of these measures, inflation has moderated globally. Both Banxico and the Federal Reserve have begun discussing possible adjustments to their monetary policy. The Bank of Mexico has signaled that it could start cutting the benchmark rate in March, while the Fed is cautious. Based on the Chicago futures market, the U.S. Federal Reserve is expected to cut interest rates through June. In this scenario, the Mexican peso would depreciate due to a reduction in interest rate differentials.
Taking these factors into account, a negative market sentiment influenced by geopolitical factors and a possible economic slowdown on both sides of the border could affect the Mexican currency. Therefore, and based on projections of the last five elections in Mexico, it is estimated that the exchange rate throughout the year will fluctuate between 16.76 and 18.46 pesos per dollar.
USD/MXN PROJECTION | ||||
|---|---|---|---|---|
Spot | T1 | T2 | T3 | T4 |
17.00 | 16.76 | 17.61 | 17.10 | 18.46 |
Variación: | -2% | 5% | -3% | 10% |
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